Preventing Parallel Imports of Trademarked Goods through Copyright Law
Traditionally, trademark owners have primarily relied upon exclusive distribution agreements between manufacturers and distributors to control the flow of their goods within the market. However, the territorial restrictions in these agreements are subject to privity of contract and, therefore, suffer from the third party beneficiary rule. As a result, while trademark owners have control of their goods within these established distribution networks, they cannot enforce the terms of these agreements on third party resellers who legally acquire goods in an alternative territorial market. Furthermore, when drafting these agreements, trademark owners must be wary of issues relating to anti-competition law. For example, provisions within Canada’s Competition Act prohibit vertical restraints through practices such as resale price maintenance, predatory pricing, refusals to deal, exclusive dealing, tied selling, and general market restrictions.
Failing to find adequate protection, trademark owners have sought alternative remedies that lie outside the boundaries of trademark law. Some of these sources include: language legislation, packaging and labeling laws, specific product regulations, or through contractual rights. However, one interesting strategy that trademark owners have recently employed involves recourse to the Copyright Act. Subsection 27(2) of the Act outlines what is known as secondary infringement by stating that it is infringement to import into Canada a copy of a work for certain outlined purposes that the person should have known would infringe copyright if it had been made in Canada by the person who made it. In other words, it is an infringement to sell “fruit of the poisonous tree.” Although the majority of commercial goods do not qualify for copyright protection per se, these rights can be claimed for incidental features such as logos, labels, or packaging. Trademark owners have attempted to argue that importation constitutes secondary infringement of the protected artwork contained within their product’s dressing; see Kraft Canada Inc. v Euro Excellence Inc.
The success of this strategy is dependent upon several factors. First, because of the doctrine of exhaustion, codified in s. 3(1)(j) of the Copyright Act, simply reselling a legally acquired good is not considered infringement; upon doing so, the seller exhausts the copyright owner’s ability to assert their rights in those goods. In other words, the goods are free to be resold in the market without need of the copyright owner’s consent. Rather instead, in order to find secondary infringement from importing products into Canada for resale, there must have been a primary infringement of copyright by the manufacturer or producer of those goods. If primary infringement is required for a finding of secondary infringement, then it follows that the trademark owner must either be the owner or possess an interest in the Canadian copyright such that they may enforce it against all third parties. This is of importance because consent precludes a finding of infringement. As David Vaver writes, “the claimant who does not plead and prove his lack of consent to the defendant’s act omits an essential element of copyright infringement and should have his case dismissed as a result.” This was one point of primary concern in Euro Excellence where the Court’s decision suggests that where trademark owners are not the owner of the Canadian rights to an artwork, the solution is to simply restructure agreements to transfer copyright as an assignment, rather than an exclusive license.
As an aside, the distinction Rothstein J. makes in Euro Excellence between the interest granted in an assignment versus that in an exclusive license is arguably based upon a fundamental misunderstanding of section 2.7 of the Copyright Act. The Act reads that an exclusive license is an authorization to do any act that is subject to copyright to the exclusion of all others including the copyright owner. Rothstein J. misreads the words of the Act so as to construe an exclusive license as dealing with matters of agency rather than consent. This is largely due to poor drafting within the Act itself, which is evidenced from the inconsistent language introduced by the 2012 Copyright Modernization Act. This can be supported by looking at section 27 where it defines infringement as any act taken “without the consent of the owner of the copyright” and again in section 38.1(6)(c) where it states that statutory damages will not be awarded where the copy in question was made with consent. The original language of the Act suggests that an integral element of infringement is a lack of consent, which is a concept distinct from authorization. The term was likely introduced into the language of section 2.7 where it was intended to hold the same meaning as ‘consent.’ Given the reason for obtaining the means of exclusive control when drafting exclusive licenses, clearly a licensee must be able to enforce the acquired rights, even as against the owner-licensor, otherwise, the licensor would have the ability to compete directly with the licensee, thereby rendering the agreement meaningless. Rothstein J.’s interpretation of the text, whereby the plain and ordinary meaning of ‘authorization’ is given effect, is in conflict with Parliament’s clear intention to confer a right of enforcement to the licensee against the owner-licensor.
Second, trademark owners must be mindful of their how their behaviour might be viewed with respect to anti-competition law. When making determinations of anti-competitive behaviour, careful consideration must be taken to the nature of intellectual property rights because it is only natural that these rights will have the effect of limiting competition as that is the very purpose they seek to achieve. However, it is in the degree of that limitation that the Competition Act addresses itself. A distinction is made between acts that lessen or limit competition and acts that unduly limit competition, which fall under the scope of section 32 of the Act whereas the former do not. Though claims for copyright infringement may not directly contravene the provisions of the Act, where an intention to limit or prevent competition can be shown, this could be used by the defendant to support a defence of unclean hands or allegations of copyright misuse; see Volkswagen Canada Inc. v Access International Automotive Ltd. and Havana House Cigar & Tobacco Merchants Ltd. v Worldwide Tobacco Distribution Inc. The implication from this is that even where a remedy would otherwise be barred by a failure to meet statutory requirements, it would not necessarily bar the defendant from raising an equitable defence.
Finally, the practice of using copyright law to fill the gap where trademark law ends raises concerns over whether Parliament intended for intellectual property rights to overlap in this manner. The argument made against overlapping rights is that the consequences of this practice lead to “double dipping,” where owners enjoy an additional layer of protection that potentially results in the rights holder being overcompensated. In addition, this practice shows how the law can easily be manipulated to stifle competition as copyright moves away from its core function of protecting cultural products into the realm of ordinary industry and commerce. Copyright law is meant to protect culture and less about protecting businesses from competition. Commentators have argued that using copyright to prohibit importation of non-copyrightable goods is simply not in accordance with the underlying purpose of the Copyright Act. Although many of these considerations received the courts’ attention in Euro Excellence, they have yet to inspire a conclusive decision on the issue. The Court’s ruling is problematic because it fails to properly address these issues due to the majority’s explicit refusal to engage in a policy analysis.
The question still remains as to whether the rights under the Copyright Act should be read down to protect only the legitimate economic interests of the copyright holder rather than those that are merely incidental to other forms of intellectual property protection. This particular aspect of intellectual property law has been left unsettled with no bright line offering guidance to litigating parties in the future and seems to be an issue that the courts have left to be addressed by Parliament alone on another day.